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The five biggest mistakes new stocks investors make

The five biggest mistakes new stocks investors make

Stocks has been on rampage since they hit their lows in 2009. Just in 2013 alone, the stocks market gained 30%. And because of the recent gains, more individuals investors have been getting into the market. And if you are one of the new investors, you will probably make a few mistakes before finally figuring out how stock investing works. Here are six of the biggest mistakes that new investors make in the stock market.



Fear of missing out (FOMO)

When first starting out, it is extremely easy to be trigger-happy. You see a stock going up for consecutive days and want to get in before it goes up more. You do this because you fear that the price will never get back down and the stock will shoot straight up like a rocket. So you don’t want to miss out.

But that vast majority of the time, this simply isn’t the case. Stock goes up, then retraces back down, then goes up again, and them again goes down. That is how the stock market works; is it the natural nature of any market which operates upon supply and demand. Very rarely do you see a stock shoot straight up without going back to its support levels. So although you are tempted to buy a stock on its way up, you might want to wait it out to see to see how it moves and do a little more research before buying into a soaring stock.


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Buying cheap stocks that aren’t really cheap

A $1 stock can be extremely expensive and a $400 stock can be extremely cheap. The objective price per share is not an accurate measure of how cheap or expensive the stock is

One of the first metric you should pay attention to is the Price-to-earnings ratio (P/E ratio) if you want to evaluate the value of a stock. That is, how much people are willing to pay per dollar of the company’s earning. Historically, the average P/E ratio has been hovering around 20 for the market as a whole. A company with P/E ratio of 0-10 is considered undervalued. Ratios (above 20) suggest that investors are expecting higher earnings in the future and therefore are investing in the future. However, it is more useful to measure P/E of one company against another company. A company not making money cannot have a P/E ratio.



Do not know the rules of investing

Rules set by the SEC is another thing many novice stock investors do not know. For instance, novice investors do not have a firm grasp of concept of concepts of settlement period (t+3), free riding violations, wash sales, and the numerous other SEC regulations. So before getting your feet wet in the market, get to know those specific stock investing rules first.



Buying before research

Not doing enough research before buying is a fatal flaw that many new investors suffer from. When I was a new investor. I relied on a lot of hearsay for my investments “instead of doing my duel diligence, I lost thousands that way.

Financial news and metrics can be extremely daunting to those new to the industry. Financial jargon is intimidating – but knowing then can make or break you. Before buying, always do research on the individual company and its corresponding industry – whether it is its past failing, current, or future prospects.


Putting All Your Eggs In One Basket

On the flip side, putting all your eggs on one basket is also a mistake.  Putting all your eggs in one basket is often more dangerous than over-diversifying.  Sure the one sole company you own can run up and can give you 100% return on your investment—but that same stock can also plummet and cut your portfolio down to pennies.

If you are starting with $3,000 or less, invest in one company first.  Then as you gradually put more money in your portfolio, you should buy other companies to hedge against potential losses.

If you are new to stock investing, take the time to learn the fundamentals as well as the technical of stock investing.  Read about the rules the SEC has in place and be sure to not make the six common mistakes summarized above.  So if you are ready to get started investing in stocks, take a look at these ten cheap online brokerages to get started.

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